
Do you think Option Trading is not for you as beginner, but why?
Let us help you understand options trading in an easy way.
Lets first understand what is an “Option” & some essential key points to know about Options Trading.
Investors who trade or have portfolios usually have constructed stocks , ETFs , Bonds & even Mutual Funds where as Option are another trading instrument, when correctly used may offer you many advantages which are not available in trading in stocks and ETFs.
Options is basically a contract given to buyer the right to BUY (in the case of call) or SELL (in the case of put) but not the obligation for both in term of the underlying asset at specific price on or before certain date .
Options is called a derivatives contract because the value of options is an derivate of the underlying asset & hence provides a High Risk – High Reward trading opportunity due to its volatility in price.
Here, we can think of using options like an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn.
However, majority of traders use options just as a trading tool and not for hedging their investments. This is because the movement of options is really interesting wherein based on the underlying instrument’s movement the options price in can go up by 200% to 500% in a single day itself! However on the flip side the price of options can reduce by more than 90% in a single day as well, this is the reason why having a good research analyst who can provide right analysis in daily basis is very crucial!
Types of Options – CALL & PUT
CALL OPTION
A call option is a typical contract that provides purchasing rights to a buyer. Thus, buyers have the privilege to purchase a particular underlying asset at a certain price. Most importantly, call options come with expiry dates.
Most important for traders to remember is CALL OPTIONS WILL GO UP IF UNDERLYING INSTRUMENT PRICES GOES UP AND VICE VERSA
PUT OPTION
The put option provides a buyer with the right to sell the underlying asset at the specified strike price. However, there is no obligation for the buyer to do the same but the ‘ put option’ seller has to buy the asset when the put buyer starts exercising their rights.
Most important thing for put option holders is to remember:-
PUT OPTION WILL GO UP IF PRICE OF THE UNDERLYING INSTRUMENT GOES DOWN AND VICE VERSA
Key Terms Relating To Call And Put Options
Now that you know what are call and put options, let’s look into the basic terms:
● Spot Price-It is the current price of the underlying asset within the stock market.
● Strike Price-This price is where the buyers and sellers decide to buy or sell the underlying asset after a specific period.
● Option Premium-It is the non-refundable amount that the option buyer pays upfront to the option seller.
● Option Expiry -Options contracts are deemed to expire on the last Thursday of the month and for weekly contracts they expire on Thursday of every week.
The Bottom Line
Options do not have to be difficult to understand when you grasp their basic concepts.Options can provide opportunities when used correctly and can be harmful when used incorrectly.